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Zenefits: Don't Worry About Wash. State's Free Software Model Ban

Zenefits is in the midst of a new chapter but the human resources (HR) tech startup is still running into some roadblocks. This week, the state of Washington's insurance commission declared the Zenefits free HR software business model to be illegal.

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The company subsequently announced it has come to an agreement with the state to charge $5 per user per month for its base HR, benefits administration (BA), and payroll applications. Though, given how the company's business model and overall direction have shifted in the past year or so, the decision to charge isn't all that surprising.

Zenefits overhauled its platform and image with Z2 this past October, a much-needed re-brand that also began to move away from the freemium HR model that has defined the startup since it burst into the space in 2013. The model is simple (companies give away a basic product as a teaser for upgraded, fee-based features) and is employed to varying degrees across the Software-as-a-Service (SaaS) space.

The company's agreement with Washington's insurance commission mirrors the already established pricing for many of the premium HR apps in Z2. The company's new HR Advisor app, its payroll time and attendance tracking feature, its Zenefits Payroll service, and its commuter benefits are all priced as standalone services at $5 per employee per month plus additional fees. No company enjoys waging state-by-state regulatory battles—particularly one that just got slapped with a $7-million penalty in California for past insurance licensing violations. I spoke with Jessica Hoffman, Vice President of Communications at Zenefits, to fill in some larger context about how the company is handling the issues.

First, Hoffman pointed out that this isn't the first time Zenefits has run into this kind of state-by-state issue. The state of Utah banned Zenefits in 2014 amid a contentious public feud with then-CEO Parker Conrad, only to reinstate the software in 2015.

"Utah came to us with this concern two years ago and, under previous management, our approach was very confrontational," said Hoffman. "Our approach is markedly different now. Free is no longer critical to the success of the company. We have a lot of free products now. The compromise we reached with Washington is just that, it's a compromise. They've asked us to charge for our free products and we've put together a package for Washington customers we think is pretty attractive for employees."

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Current CEO David Sacks took over leadership after Conrad's resignation in February of this year, immediately re-focusing the startup on the small to midsize business (SMB) market. Hoffman said the agreement with Washington has served as an inadvertent way to help prepare the company for any similar state regulatory issues in the future. She called the deal a "template" for any other state that wants to work with the startup on a mandated pricing model.

"We don't think our product has to be free; there's a willingness on our customers' part to pay for the kind of all-in-one HR platform we're providing with Z2," said Hoffman. "The reason this decision ended up being a good thing is that now it takes the existential risk off the table. Before, we didn't have a template for how we would handle this. Now we do. For us, it's progress and a step forward.

"Z2 introduced a lot of new paid products. We're definitely evolving as a company and, in a couple [of] months, I think the industry will look back on what happened in Washington as an important precedent. For all the businesses that find our software so valuable, $5 per employee is more than palatable."

Zenefits lawyer Josh Stein also provided a statement to Business Insider reacting to the Washington decision and pricing model agreement.